Marketing StudyOff-shore Pipe Laying - Caspian SeaMarket AnalysisGozel RahmanovaMIRBIS MBA Class 57 of 2010

Agenda

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1. Bumi Armada Company Profile2. Market Geography3. Macro Economic Factors4. Turkmenistan Key Economical Data5. Factors Impacting Supply and Demand6. Current Supply and Demand7. Market Participants8. Market Power9. Market Entry10. PEST Analysis11. SWOT Analysis12. Price, Supply and Demand Forecast13. Reference List O

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1. Bumi Armada Company Profile

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Bumi Armada was founded in 1975Part of the UTI Group, largest private company in MalaysiaMalaysia’s largest off-shore services providerActivities in 11 countriesMultinational and multi-cultural organization with 22 different nationalitiesAnnual turn-over approx. USD 300 millBusiness segments:

- Transportation & Installation (T&I)- Off-shore Support Vessels (OSV)- Floating Production Storage Offloading (FPSO)- Fleet Management (FMS)- Integrated Project Services (IPS)- Transportation & Installation (T&I)- Exploration & Production (E&P)

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2. Market Geography

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- 5 countries bordering the Caspian Sea- Land-locked sea with only Volga canal providing accessibility- Region rich in hydro carbon resources

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3. Macro Economic Factors

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The following macro economic factors have a big impact on the demand for transportation and installation services in the Caspian:

• Global Economy

• Oil Price

• Energy Consumption

• BRIC GDP Growth

• Interest Rate Development

All projections are that the demand will significantly increase over the medium to long term, with little to no additional supply.

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3. Macro Economic Factors – Global Economy

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After the deep financial crisis in 2008/2009, there is a general consensus that the recession is over and that the global economy has rebounded. This will positively effect the investment climate, and comments from the recent World Economic Forum in Davos, Switzerland are that the immediate future looks brighter than first anticipated.

Although the global GDP growth will not reach the previous height of 2006/2007 in the foreseeable future, driven by the emerging and developing countries, an average of 4.5% until 2015 is nevertheless seen as healthy.

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3. Macro Economic Factors – BRIC GDP Growth

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BRIC (Brazil, Russia, India and China) is the catalyst and growth engine of the future. These economies are expected to be larger than the traditional G6 by 2040, driven by population growth, production output and infrastructure development. Turkmenistan’s own GDP growth is estimated at 11% for 2010, which further drives the demand up.

The end result of such rapid growth is a higher demand and need for energy, which primarily will still come from traditional energy sources such as oil, gas and coal.

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3. Macro Economic Factors – Oil Price

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Oil price is the single most important parameter in determining and predicting the allocation of funds for exploration and production of hydro carbons by the oil companies. A high oil price will attract additional investments as the returns are financially viable. From a low of USD 40/barrel in 2008, to a steady price of USD 80-90 in 2010, forecasts are that the global index will continue to increase, caused by reducing reserves, higher demand and increased production costs.

It is generally accepted that an oil price above USD 70/barrel will lead oil companies to increase investments.

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3. Macro Economic Factors – Energy Consumption

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Global population growth, industrialization, an increased middle class with higher spending power and development of the 3rd world countries will all lead to a significant increase in the demand for energy. Whereas focus is now directed at green and renewal energy, the increase in demand can not be covered by alternate energy, and thus the need for traditional sources of fuel such as oil and gas will remain high.

UN forecasts that by 2030 the world population has grown to not less than 8 billion people, much of the growth coming from developing countries.

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3. Macro Economic Factors – Interest Rate Development

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The final factor impacting the investment climate is the access to financing. After the global economic crisis in 2008/2009, many lenders took a more conservative approach and thus it was increasing difficult to gain access to capital for investments – the risk willingness was significantly reduced. This has now changed for financially sound and viable projects, and with a stable and low LIBOR rate, it is expecting that investment will accelerate within the oil and gas industry.

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4. Turkmenistan Key Economical Data

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GDP Growth (2010): 11%

GDP by Sector: - Agriculture 10.2%- Industry 30.0%- Services 59.8%

Inflation Rate : 12%

Unemployment : 60%

Oil Production : 120,000 bbl/day

Oil Export : 40,000 bbl/day

Gas Production : 34 bill m3/year

Gas Export : 14 bill m3/year11

5. Factors Impacting Supply and Demand

Oil PriceThe forecasted oil price is the main indicator of willingness from oil companies (our customers) to invest. With a normal lead time of 5-8 years from project commencement to first oil/gas, short term fluctuations do not impact immediate demand much.

Exploration BudgetsAgain driven by oil price, and thus expected financial returns, oil companies will increase or decrease their spending within exploration, thus affecting the demand for our services.

Risk WillingnessIn good times, the risk willingness is higher, and the banks are more likely to borrow and finance even projects with a certain risk element. During the global economic crisis it was very difficult to obtain loans as the bank were risk adverse, this has now changes somewhat, although more prudence is being applied today.

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6. Current Supply and Demand

In our industry the quantity supplied is fixed in the very short run no matter what the price, hence the supply is perfectly inelastic.

Perfectly inelastic: 0 < Ed < 1

In this market there is no possibility to change existing resources (capacity is fixed) and the price depends solely on demand.

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7. Market Participants

Bumi ArmadaMalaysiaBarge: Armada InstallerBuild year: 2010Derrick Lay BargeMax. lifting capacity: 850 tonswww.bumiarmada.com

MomentumUnited Arab EmiratesBarge: Israfil GuseynovBuild year: 1990Derrick Lay BargeMax. lifting capacity: 250 tonswww.momentumdubai.com

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8. Market Power

Herfindahl Index (HHI): H = S12 + S2

2 + … + Sn2

H = 602 + 402 = 5,200 >1,800CR3 = S1 + S2 CR3 = 60 + 40 = 100 >80 : high concentration market

Our market is a pure oligopoly, non-cooperative market, reason being:- Only 2 competitors- Product is homogeneous- Market power is high- Barriers to entry are high

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Bumi Armada

60%

Momentum40%

Market Share

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9. Market Entry

High Capital CostsOur market is highly capital intensive, and the min. investment required to enter the market will be USD 250 mill. At the same, the lead time for construction of a pipe laying barge is min. 18 months.

Specialized ExpertiseIt takes highly qualified and experienced personnel to operate a barge, and the success of the operation depends as much on the people as the barge itself. Expertize can be bought, but the pool of talent is limited and it will be difficult for a new player to attract people from established companies.

Advanced TechnologyTo construct a barge it is required to partner with one of the reputed technology suppliers in the market. These companies normally have long lead times for delivery, and will prefer to work with well known players in the market.

Track Record and ReputationCustomers will normally prefer a reputable supplier with a proven track record.

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10. PEST Analysis

PoliticalIncreased protectionismLocalizationTransparencyIncreased risk management

EconomicalIncreased E&P spendingCheap and stable interest ratesIncreasing oil priceNo more cheap oil

SocialLocal contentCorporate Social ResponsibilityIncreased middle classGlobal population growthDevelopment of 3rd world

TechnologicalGreen energy movementScrapping of old tonnageInformation technology

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11. SWOT Analysis

StrengthsKnown and respected nameStrong financial backingSmall but agileIn-house competencies

WeaknessesLimited track record in T&IOnly asset tied in long contract

OpportunitiesField expansionAbility to collaborate

ThreatsLoss of assetNew players (minor threat)

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12. Price, Supply and Demand Forecast

The price, supply and demand forecast for pipe laying in the Caspian Sea will, in addition to the general macroeconomic factors, depend on the following:

- New Concessions given out

- Expansion of existing fields

- Marginal fields becoming attractive

All macro economic factors point towards a higher demand long-term, and also local and regional factors within the Caspian Sea favour an increasing demand.

High barriers to entry will prevent or limit the influx of increased capacity, and hence the existing market players can expect higher utilization rates and better prices.

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2010 2011 2012 2013 2014 2015

Supply 100 100 100 100 100 100

Demand 90 100 110 125 135 150

Price 90 100 120 135 145 170

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13. Reference List

http://www.forecasts.org/oil.htm

http://www.marketoracle.co.uk/Article6153.html

http://budgeting-investing.ameriprise.com/planning-and-budgeting/financial-analysis/market-strategy-viewpoint/2009-07-21.asp

http://www.imf.org/external/pubs/ft/weo/2010/01/c1/fig1_2.pdf

http://www.bricconsulting.com/

http://www.eia.doe.gov/oiaf/ieo/graphic_data_world.html

http://www.equityvista.com/public/interest-rate-forecast.php

http://www.infield.com/market-forecast-reports/offshore-middle-east-caspian-sea-market-report

http://www.caspian-offshore.org/news/2010/09/10/caspian-sea-set-for-offshore-resurgence.html

http://www.snamprogetti.it/module.asp?sect=flotta&pag=castoro12

http://www.momentumdubai.com/Presentations/Pipe%20Lay%20Barge%20ISRAFIL%20HUSEYNOV%20Specifications.pdf

http://www.un.org/esa/population/publications/longrange2/WorldPop2300final.pdf

https://www.cia.gov/library/publications/the-world-factbook/geos/tx.html

http://ngpedia.ru/

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